Anti-corruption clauses in international trade agreements: Should the Indo-EU Agreement have one?

Anti-corruption clauses in international trade agreements: Should the Indo-EU Agreement have one?

Bhargavi Zaveri

Bhargavi is a Mumbai-based Solicitor and has an M&A, PE and
general corporate practice in India. She is presently part of a research
program at Harvard Law School and is researching on investment policy
and lawmaking, and the interface between legal professionals and
policymakers in India.

India and the European Union are closer, now more than ever before, to finalizing the Trade and Investment Agreement (Indo-EU TIA/ Agreement),
which they have been negotiating since 2007. This is perhaps the
perfect time for India to press for ‘anti-corruption’ provisions to be
included in the still-being negotiated Agreement. Taking cue from its
experience in the Bofors scam, the 2G scam and more recently, the
Augusta Westland scam, India could use the Indo-EU TIA as a platform to
deter potential foreign investors and trade partners from inducing a
corruption-infested culture in developing economies. Also, this would
send out a strong anti-corruption message at a global level from a
Government widely perceived as scam-ridden.

In the context of international trade and investment agreements, an
‘anti-corruption provision’ can have different meanings. It may mean a
provision obligating the countries party to a trade agreement to combat
corruption within their respective countries by adopting global
anti-corruption conventions, increasing transparency in Government
procurement processes, etc. More unconventionally, it may refer to a
provision that deprives a trade transaction or investment infected by
corruption of the standard protection offered by the trade or investment
agreement. This post concerns itself with the latter meaning.

International trade and investment treaties offer certain protections
to foreign traders and investors. The existing legal regime in this
area suggests that investments proved to have been tainted by corruption
are divested of such standard protection. The award made by the
International Centre for Settlement of Investment Disputes (ICSID) in what is popularly known as the World Duty Free case
can be cited as the beacon in this direction. The litigation involved a
claim brought by a foreign investor against the Government of Kenya.
The investor sought damages from Kenya for having wrongfully
expropriated the investor’s duty-free business. In the course of the
proceedings, the claimant-investor admitted to having bribed the Kenyan
President to procure a license to operate the duty-free business. On
this basis alone, ICSID rejected the investor’s claim by relying on the
concept oftransnational public policy.

The more recent Argentine-Seimens case should
also inspire India to press for anti-corruption provisions in the
Indo-EU TIA. In 2002, Siemens, a German conglomerate, instituted
arbitration proceedings against Argentina under the German-Argentine
Bilateral Investment Treaty. Siemens alleged unlawful expropriation by
the Argentine Government for having unilaterally terminated a Government
contract procured by Siemens in Argentina. The tribunal directed
Argentina to pay damages to the tune of USD 200 million to Siemens for
having unlawfully expropriated its investment in the country. During the
pendency of the proceedings, it was found that Siemens had bribed
Argentine officials for procuring the relevant tender. Consequently,
Siemens voluntarily surrendered its award and withdrew all claims
related to the case.

In addition to combating corruption within the country, inclusion of
anti-corruption provisions in the Indo-EU TIA will benefit India
strategically. Not only will it result in dispersing the general
perception of the vulnerability of developing economies to corruption,
such a provision will also enable the Indian Government to indisputably
avoid extending the benefits of a treaty to a foreign investor who is
proved to have engaged in corrupt practices in the course of doing
business in India.

Many international trade and investment treaties contain provisions
that protect only those investments that are made ‘in accordance with’
the law of the country in which investment is made (commonly referred to
as the Host Country). More often than not, countries defend acts
of expropriation by arguing that the investment in question was not, in
fact, made in accordance with the law of the Host Country. For
instance, in Inceysa Vallisoletana S.L. v. Republic of El Salvador,
Inceysa, a Spanish company, instituted arbitration proceedings under
the El Salvador/Spain BIT claiming compensation from the Salvadorian
Government for unlawful expropriation of its Salvadorian business. El
Salvador argued that Inceysa had obtained the relevant Salvadorian
concession illegally by submitting false financial statements and making
misrepresentations. The tribunal accepted these objections and
dismissed the claim, as the investment was not made in accordance with law.

To conclude, both practice and jurisprudence indicate that the
defense of corruption is increasingly available to countries fighting
compensation claims for expropriation under investment and trade
treaties. Such defense has, in the past, been allowed on the grounds of
international public policy or the ‘in accordance with the law’
provision discussed above. However, instead of relying on
jurisprudential history or a somewhat broadly defined concept of
transnational public policy, it may well be worth India’s time to
negotiate anti-corruption safeguards in the Indo-EU TIA at this stage
itself. Moreover, given the track record of the EU in promoting
anti-corruption and bribery conventions at a global level, it may be a
far less contested issue in the negotiations.